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So much for Dutch disease

Federal Opposition Leader Thomas Mulcair says he doesn’t regret bringing up the issue of whether Canada suffers from “Dutch disease.” He might be the only one. The newspapers have been so full of this phrase for the last few weeks that the very sight of it must make most of us want to grab and assault the first person we can find named Van Der Whatever.

It would be some comfort if the Dutch disease debate had been handled impeccably in the press, but it hasn’t been. Dutch disease is a theoretical phenomenon in economics that occurs when high prices for raw resources attract capital and labour away from advanced manufacturing, rebalancing an economy in a hard-to-reverse, welfare-diminishing way. If the resource boom is strong enough to jolt the currency upward, that’s a double whammy for the manufacturers, to the degree they are dependent upon exports.

But a resource boom only becomes a “disease” if the economy doesn’t react with equal efficiency when the resource runs out or the price declines, because the manufacturing sector has shrunk and its markets can’t be recaptured easily. The concern is that there are beneficial “spillover” effects of having advanced manufacturing that are more easily lost than recouped; if a country loses a computer-chip factory, for example, it might not be able to open it again later, because the closure discouraged young people from getting the kind of engineering education you need to make and market chips.

It’s important to realize that the Dutch disease story has three components, all of which must be present for the diagnosis: (1) a shift from a “lagging sector” to a “booming sector” that (2) is redoubled by a strong currency and (3) creates some long-term harm because the lagging sector cannot rebound readily. That third condition is the actual “disease” part. But even economists explicitly discussing Dutch disease don’t always get around to tackling part 3, and certainly Tom Mulcair and his defenders haven’t.

Last week, for example, when everybody ran gotcha headlines along the lines of “Harper government funded study on ‘Dutch disease,’ ” it was pretty clear that the study hadn’t been read carefully. The paper co-authored by Canadian economist Serge Coulombe is called, “Does the Canadian economy suffer from Dutch disease?” But its actual focus is only on the second part of the diagnosis: to what degree is the strong Canadian dollar encouraging a shift away from manufacturing?

Coulombe et al.’s finding was that even if you just focus on the exchange-rate effects—in other words, if you leave aside the huge globalization impacts that are hurting manufacturing most in the Western democracies—only about half the effect is attributable to the Canadian dollar as such. The rest results from the relative recent feebleness of the U.S. dollar, which is out of the hands of Canadian policy-makers.

The paper thus urges skepticism about Dutch disease in Canada. It also found that the harms inflicted on manufacturing by the strong Canadian dollar weren’t particular to advanced manufacturing. Textile mills were the hardest-hit sector of all. Producers of machinery and computers were affected by the strong loonie, but so were the plastics, rubber and paper businesses. A second study, published by the Institute for Research on Public Policy on May 16, arrives at similar conclusions.

One must sense, hearing of this finding, that talk of Canada’s oil and gas industry creating a Dutch disease is a combination of semantics and ignorance. On paper, Alberta synthetic crude is defined as “resource extraction.” A paper mill isn’t. In reality, jobs and capital flowing from paper mills to Syncrude is excellent news, if a sophisticated knowledge economy is what we want. The fast-growing parts of the oil patch—steam-assisted gravity drainage in the tar sands, hydraulic fracking in the Bakken formation—are creating nuclei of engineering know-how and demand for everything from chemists to environmental scientists.

If textile makers can’t keep up, that’s not Dutch disease; textile jobs aren’t jobs we want to protect for “spillover” reasons. But Mulcair wants us to imagine ultra-skilled workers from Ontario abandoning their accumulated knowledge and their humanity as they shuffle off to Alberta to lug pipe like brutalized automata. The accusation of regional prejudice is inescapable. (Moreover, poor Alberta continually pours billions into the federal equalization program, with added costs in inhibited labour mobility, so that other provinces get a break when times are good out west. Does this cash not cushion the effects of regional booms enough? What is Alberta paying for if not goodwill?)

Meanwhile, Mulcair’s references to Dutch disease obscure his environmental criticisms of the oil patch, which have no logical connection to currency issues or industrial strategy. On May 18 he told a scrum, “We’ll just keep coming back with what the real issue is. The real issue is polluter-pay.” If that’s the real issue, why not stick to it?

If you look at the actual IRPP report (I did), you see that it is gauging Dutch disease by looking at the impact of Canada’s exchange rate surge on different industries. It doesn’t talk about whether those sectors would be able to rebound quickly if say, oil production fell and the dollar collapsed in the future (or even whether these are industries Canada needs to be in).
If you look at the sectors impacted by exchange rates, they are generally low-tech, labour-intensive sectors, like textiles and leather manufacturing. Also some high tech sectors benefit from Canada’s exchange rate, because it allows them to purchase capital equipment more cheaply.

Canada has flailing productivity, $50B trade deficits (-3% GDP, 3 years in a row), 500,000 good-paying jobs vanished, record level youth unemployment, record levels of personal debt. According to the RBC, “Almost three-quarters of the competitiveness gap is due to the soaring loonie.”

ON was pumping out $25B/yr in equalization payments a few short years ago, but now is a have-not province.

Although a highly overvalued dollar may make purchases of equipment cheaper, it increases the value of other costs like labor. The OECD says the fair value of the dollar based on PPP is 81 cents US. That means the cost of real wages are 25% higher, which pretty near every economist would tell you is a job killer.http://bit.ly/JQMoyr

It is the greedy NDP union bosses that have destroyed most of the manufacturing jobs in Canada,drove them all out of the country to places like China, India, Mexico, etc. Most of these jobs disappeared when we had a 60 cent dollar because of union greed.

The real reason’s for manufacturing decline in the west is vulture capital, Romney’s Bain Capital are world class leaders, buy a thriving business hollow out the business, shift business to a third world, use the good business name to maintain capital flow at greatly reduced cost and quality. Mean while supply all shipping to fully contain the capital flow in a closed feedback circuit. Who do you think is investing in third world countries while they live and enjoy the western lifestyle, all the Bankster’s, Daddy Warbucks and Oil Gangster’s who by the way always earn praise from their 100% controlled Western “capitalist” governments.

This has been going on since Ronnie Raygun’s days and nobody talks about the real economic realities of living with/under the Big Western Con game.

Or you need to read the Maclean’s article. The author of the article is saying that Dutch disease involves three components: (1) a shift from a “lagging sector” to a “booming sector” that (2) is redoubled by a strong currency and (3) creates some long-term harm because the lagging sector cannot rebound readily.
The IRPP report is only looking at empirical evidence of (2) – did the rise in the loonie hurt Canada’s manufacturing industries. The affected industries – being low-tech low-skill sectors – could likely rebound back quickly if say, Canada ran out of oil, and our dollar fell in value.
The choice we face is essentially this. We could curtail oilsands development, which would have some environmental benefits, and preserve bad jobs in the 25% of industries facing adverse exchange shocks (industries that would recover anyway if we ran out of oil).
Or we can maintain the status quo. It is dirty development (and I think we can do more to make the oil sands greener – though I note that oilsands oil is cleaner than coal, which is what most countries will start burning if less oil is developed), but it is also enormously profitable. Moreover, capital-heavy and high-tech industries in Canada may benefit from a high loonie, which allows them to purchase foreign capital equipment more easily (remember in the 90s when businesses were complaining about the low loonie).
Personally, I think the choice is pretty obvious.

Finally……..”The rest results from the relative recent feebleness of the U.S. dollar, which is out of the hands of Canadian policy-makers.”
The USA keeps de-valuing their currency with QE and ‘twists’, China pegs their currency to the US $, the Swiss pegged their franc to the Euro. Toms an idiot and a dangerous one at that.
There have been several articles lately on Ontario companies that have re-tooled and are manufacturing items necessary for the oil and gas industry.

They are only recovering a fraction of the business lost. Besides that, wouldn’t the high dollar make purchasing related items from the US more cheaper? (A supposed benefit of the overvalued dollar.) That’s pretty much the reason why they are building the bitumen pipelines to ship tens of thousands of processing jobs out of the country.

Dude, as long as there’s a single job in Ontario or one business making money the CPC will scream “see they’re all just lazy look at all the success in that one job/one company!”

Some guy a few days ago was going on and on and on about how the manufacturing sector needed to make children’s toys, as if that was a solution for the tens of thousands of jobs lost over the past few years.

The issue is related to both economics and environmental concerns. As well as Canada’s economic strategy. Harper’s backwards and shortsighted vision of turning Canada into a “resource superpower” is absurd in the 21st century. In the age of information technology do we want to put all our eggs in the resource extraction basket because we’re presently in a commodities boom? Fact is there was a similar boom in the early 1980s that turned to a bust by the mid-1980s when the economy recovered. Then Alberta found itself in hot water.

Canadians are more than hewers of wood and drawers of bitumen. We need some balance to the economy so all provinces can prosper (like back when the Liberals were in charge.)

Canadians are more than hewers of wood and drawers of bitumen. We need some balance to the economy so all provinces can prosper (like back when the Liberals were in charge.)
Oh yeah? the last thing the Liberals did when in power to balance the economy is to inject over one billion dollars in Québec,s adscam after investing another 1.4 billion in the gun registry program . Who is accountable for this? No one of course.

Yes, let us all revere his fabulous example of “how to represent an entire country”….and yet throughout his reign, his home province of Quebec was eager to separate. Go figure. Gee, you guys say Albertans whine about western alienation, what do you call this constant complaining. YES, manufacturing in Ontario has taken a hit. Manufacturing in the US is in the toilet too. We have gone through a global recession, the US dollar as been devalued by 40%. Most of Europe is in the toilet. Has Germany cut back on its coal mining? No! What would Ontario do if it had Alberta’s resources…leave them in the ground, let its debt go higher and its citizens remain unemployed?

Hey, when an entire province says i will never vote for a party because of a 40 year old policy that wasn’t terrible at the time, don’t be surprised if that party ignores that province. And don’t be surprised if the other party panders to you with stupid platitudes but gives you nothing tangible.

GFMD on May 27, 2012 at 1:45 pm

Hey, when an entire province says i will never vote for a party because of a 40 year old policy that wasn’t terrible at the time, don’t be surprised if that party ignores that province. And don’t be surprised if the other party panders to you with stupid platitudes but gives you nothing tangible.

GFMD on May 27, 2012 at 1:45 pm

How can you say “an entire province” when half of the adult population of Alberta are from “other” Canadian provinces? Regardless of whether you have a hope in hell of winning a seat…remember Danny Williams and the “anything but Conservative vote”, you still represent that region when you govern. If you have any class at all, you remember that when you are campaigning.

Healthcare Insider on May 28, 2012 at 10:51 am

Why? Canadians were stupid enough to re-elect him time and over… We were just as stupid as the Americans re-electing GWB and even more by giving Harper a majority.

The high dollar helps advanced manufacturing, because it helps one by the capital equipment for advanced manufacturing. The high dollar hurts dumb, low-skilled labour intensive manurfacturing. And Ontario and Quebec lost the dumb, low-skilled labour intensive manufacturing because of cheap labour in emerging markets.

The massive deficits and debts Ontario and Quebec are a contributing cause to the high dollar and so-called Dutch disease that is killing low-skilled manufacturing in central Canada.

And the new oil industry is nothing like the old oil industry. Dutch disease was caused because with the old oil industry, one just dropped straws into the ground and sucked out the oil and nat gas easily, with very little labour and not much skill. The new oil industry is entirely different. It is high skilled, labour and capital intensive, and produces massive economic spinoffs that the old oil industry did not.

This reminds me of the mania a few years ago to develop ‘high tech’ to replace forestry as a driver of the economy. Someone piped up and reminded everyone that something like 40% of ‘high tech’ was purchases of same by the forestry industry.

Well, no actually, Alberta doesn’t pour millions into equalization. Equalization is a program that comes from federal coffers, so while rich Alberta tax-payers may pay, so do rich tax-payers everywhere else. The province of Alberta doesn’t contribute to equalization.

Yes, taxpayers from every province pay taxes into the federal government. Then the federal government dispenses some 14B dollars to those provinces it decides are “have-not” under the Equalization program. The rest of the provinces that are determined to be “have” provinces get no money. Alberta is a “have” province so it gets no money and therefore its citizens year after year fund social programs that they will never avail themselves of. Meanwhile, the provincial government has to come up with ways to pay for the social programs like healthcare and education in Alberta because we don’t get any transfer payments. So, although it isn’t the “Government of Alberta” pouring billions into the equalization, it is the citizens of the province, half of whom hail from other parts of Canada.

An anecdote. When the dollar was low, the local auto electronics parts manufacturer produced components, wire harnesses and the like, high labor input. The dollar increased in value along with threats of unionization. The high labor components were moved to Mexico. The local processes have been improved, with very high productivity improvements in the assembling of components. These jobs were low paying.

The low dollar was a consequence of the long term weakness of the Canadian economy. Without resource development, the dollar would probably be lower, but only as a signal of the weakness of the economy. The low dollar encouraged low productivity processes; any productivity improving capital investments would be expensive bought with a low value Canadian dollar.

Could it be that Ontario is suffering the consequences of years of high government spending and borrowing, along with higher taxes? It seems I remember a few years ago the McGuinty government not decreasing corporate taxes and using the money to bail out failed firms. Maybe, just maybe government policies in Ontario and Quebec are working as designed.

Mulcair and his ilk would simply make Canadian’s poorer. Ontario and Quebec have opportunities. Just cut the cost of your government, make your jurisdiction cheap in taxation and regulation terms. If you can’t make it like it is, cut your costs.

But no, demagogue someone far away about something you dare not do anything about and get plaudits from the fools.

I remember when BC declined into ‘have not’ status. There was much bemoaning how we were victims. Oddly enough, getting rid of a profligate and incompetent government made the problem go away.

It is truly amazing to see how the “next prime minister” of Canada is so aptly able to spout off about a supposed dutch disease created in Alberta, while keeping perfectly silent on the entitlement disease sweeping Quebec.

Both issues of energy and education are provincial matters, so what gives.??

Has the cat go your tongue Tommy boy?? Or are you too spineless to have an opinion??

When the transfer system comes up for renewal, Alberta should opt out, or use the constitutional “notwithstanding clause”. We need to end the unsustainability of subsidizing Canada’s two most populous provinces by a select few (led by Alberta).

We subsidize failed Eastern socialism in order to be slagged, insulted and belittled.

Well you have to admit that Québec did it,s part in trying to leave you guys alone with your possessions in 95 but you came by airplane and bus loads in the province and told us you loved us so much that we opted to stay. Please make-up your minds.

This article with its three described symptoms suggests that the patient must be dead before a diagnosis of Dutch Disease can be made. Perhaps politicians and journalists should be a little more subtle by trying to disgnose the problem BEFORE serious damage is done. I think that is what Mulcair is trying to do. It is ironic that Mulcair is being pilloried by Harperites for saying almost exactly what conservative icon Peter Lougheed has been saying about the tar sands development since 2005. Namely that development should be more measured to prevent economic dislocations (Dutch Disease), development should only preceed when there is agreement across the country that the economic benefits can be balanced against the environmental damage, that Albertans get a MUCH higher percentage of the profits than they currently are and that tar sands development should be accompanied by nation building projects associated with the tar sands in other parts of the country (processing and refining in Eastern Canada for example). Lougheed warned that proceeding with development without these conditions would leave Albertans without proper benefits and would threaten Canadian unity. Harper has done almost exactly the opposite and incredibly has accused Mulcair of being divisive for even bringing up the issue. There is more to the tar sands problem than just Dutch Disease.

Mulcair
is 100% correct! Artificially inflated is an understatement not an
exaggeration! We collect nothing for royalty while we pay for their
transmission lines, roads and water!

Recently Redford announced
still another billion of taxpayer dollars is going into the cleanup of
the tar sands; oil pays nothing. This brought a ho hum from the
Alberta public!.

And what about the plan to use pensions to
finance a toll road (highway63) into Fort McMurray? Are you going to
wait for 20 years to find out your pension fund was poorly invested so
your returns are not what they expected?

As I said throughout the past election we cannot afford any more of this prosperity!

Because
of this, profits are certainly higher than they should be for the
industry while the province remains operating on broke; stealing
pensions to make up the short fall.

As far as the disregard
for the environment; totally correct. The policy has been and remains
“If you can’t see it; it doesn’t exist so, don’t worry about it” When
satellite pictures showed up Mildred lake like they did, this view
changed somewhat not because of policy changes but because of what
could be seen!

Rig water trucks still operate with impunity in recreation lakes around the province.

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